Chapter 7 Mishkin (7)

Macreconomics: Policy and Practice (Mishkin) Chapter 7 Drivers of Growth: Technology, Policy, and Institutions 7.1 Technology as a Production Input 1) The Solow model is used to explain ________. A) why some economies experience higher rates of growth than others. B) the relationship between price and quantity demanded. C) the relationship between the rate of inflation and the rate of unemployment. D) the notion of opportunity cost. Answer: A Topic: 7.1 Technology as a Production Input AACSB: Analytical Skills 2) Another term for an economic variable whose value is given is________. A) endogenous. B) exogenous. C) autonomous. D) ornamental. Answer: B Topic: 7.1 Technology as a Production Input AACSB: Analytical Skills 3) Physical objects are rival in the sense that________. A) they are necessarily in opposition to one another. B) they are nontrivial. C) when they are used in one activity, they cannot be used in another. D) some countries possess natural resources , e.g. oil, while some do not. Answer: C Topic: 7.1 Technology as a Production Input AACSB: Analytical Skills 4) Which of the following is nonrival in character? A) labor. B) capital. C) a desk. D) technology. Answer: D Topic: 7.1 Technology as a Production Input AACSB: Analytical Skills

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5) The ability of an owner of a piece of property to deny its use to others is labeled________. A) excludability. B) rivalry. C) non-rivalry. D) lugubrious. Answer: A Topic: 7.1 Technology as a Production Input AACSB: Analytical Skills 6) Capital and labor are distinct from technology since________. A) technology is exogenous B) technology is rival in its use. C) capital and labor are physical things. D) technology is a physical thing. Answer: C Topic: 7.1 Technology as a Production Input AACSB: Analytical Skills 7) The nonrivalrous character of technological ideas suggests that________. A) patent law protection is ultimately inefficient. B) technological change follows a logarithmic pattern. C) technology developed in one industry, e.g. the vodka industry, cannot be used in another industry, e.g. the automobile industry. D) ideas can be used over and over again. Answer: D Topic: 7.1 Technology as a Production Input AACSB: Analytical Skills 8) Which of the following is most easily excludable? A) ideas. B) capital. C) technology. D) a set of designs or instructions. Answer: B Topic: 7.1 Technology as a Production Input AACSB: Analytical Skills 9) Because original ideas are likely to become known and used by others, without the inventor's knowledge or consent, ________. A) technology is the key driver of economic growth B) new ideas contribute little to economic growth C) we refer to ideas as rival D) technology is inherently exogenous Answer: A Topic: 7.1 Technology as a Production Input AACSB: Reflective Thinking 2 Copyright © 2012 Pearson Education, Inc.

7.2 Policies to Promote Productivity 1) Investments in public infrastructure ________. A) are not subject to diminishing returns B) are a misallocation of national savings C) typically decline during periods of rapid economic growth D) may boost productivity and income Answer: D Topic: 7.2 Policies to Promote Productivity 2) Which of the following groups receives the highest wages? A) high school drop-outs. B) college drop-outs. C) individuals who complete a bachelor's degree program. D) individuals with advanced degrees. Answer: D Topic: 7.2 Policies to Promote Productivity 3) Building infrastructure is left to the government since________. A) the cost of such projects would not be economical for any individual firm. B) borrowing costs make such projects prohibitively expensive. C) inflation tends to erode the real value of debt. D) a natural monopoly would result if this activity were undertaken by an individual private firm. Answer: A Topic: 7.2 Policies to Promote Productivity AACSB: Analytical Skills 4) The U.S. interstate system was begun under________. A) President Franklin Delano Roosevelt in 1933 as part of the New Deal. B) President Herbert Hoover in 1923. C) President Dwight D. Eisenhower in 1956. D) President George W. Bush in 2002 after the 9/11 attacks. Answer: C Topic: 7.2 Policies to Promote Productivity AACSB: Analytical Skills 5) The Interstate Highway system in the U.S. has boosted economic productivity mainly through ________. A) the positive impact on tourism B) reduction in transportation costs C) increased competition among fast food restaurants D) increased speed of military deployments Answer: B Topic: 7.2 Policies to Promote Productivity AACSB: Reflective Thinking

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6) The knowledge and skills that workers have built up through education and training programs is known as________. A) the college premium. B) human capital. C) productivity. D) financial torsion. Answer: B Topic: 7.2 Policies to Promote Productivity AACSB: Analytical Skills 7) A key difference between human capital and technology is that ________. A) human capital is excludable B) human capital is nonrival C) scarce resources are used in the production of human capital D) technology is an input in the production of new technology Answer: A Topic: 7.2 Policies to Promote Productivity AACSB: Reflective Thinking 8) For the period 1915 to 2005, educational improvements in the U.S. labor force contributed what percentage of real per-capita GDP growth? A) 0.01. B) 15. C) 317. D) 34 Answer: B Topic: 7.2 Policies to Promote Productivity 9) U.S. educational achievements________. A) began to stagnate in the 1970s. B) have always fallen behind our European and Asian counterparts. C) have not had a measurable effect on U.S. growth rates. D) have not been duplicated outside the U.S. Answer: A Topic: 7.2 Policies to Promote Productivity 10) Education achievements ________. A) are a sufficient condition for economic development to occur. B) are a guarantee of making a poor country wealthy. C) cannot raise human capital. D) are both rival and nonrival in character. Answer: D Topic: 7.2 Policies to Promote Productivity AACSB: Reflective Thinking

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11) Government spending on child development promotes economic productivity by ________. A) encouraging research and development B) increasing national savings C) increasing human capital D) building infrastructure Answer: C Topic: 7.2 Policies to Promote Productivity 12) Government spending on public health promotes economic productivity by ________. A) encouraging research and development B) increasing national savings C) increasing human capital D) building infrastructure Answer: C Topic: 7.2 Policies to Promote Productivity 13) Private businesses tend to spend too little on research and development, because ________. A) investments to increase the capital stock are a better way to boost productivity B) governments tend to spend too much on research and development C) patent laws make it difficult to reap the benefits of such spending D) technology is often nonexcludable Answer: D Topic: 7.2 Policies to Promote Productivity 14) The three ways government can encourage research and development are________. A) patents, foreign aid and direct government spending. B) foreign aid, direct government spending and tax incentives. C) direct government spending, tax incentives and patents. D) tax incentives, patents and foreign aid. Answer: C Topic: 7.2 Policies to Promote Productivity 15) Intellectual property rights provided by patent systems typically________. A) provide tax incentives to encourage research and development. B) allow for the depreciation of capital. C) compensate the government for building infrastructure. D) last about twenty years. Answer: D Topic: 7.2 Policies to Promote Productivity AACSB: Analytical Skills

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16) Entities that buy up patents then try to extract large payments from companies that use similar technologies are known as________. A) Solow pirates. B) tertiary leeches. C) Great Googly Mooglies. D) patent trolls. Answer: D Topic: 7.2 Policies to Promote Productivity 17) Patent trolls________. A) are paid by innovative firms to the federal government. B) buy up patents then attempt to extract large payments from firms using similar technology. C) develop new machines and machine processes in small-scale firms, rather than large corporations. D) can evolve into natural monopolies. Answer: B Topic: 7.2 Policies to Promote Productivity 18) The Coca-Cola Company has chosen to keep its soda formula a secret, ________. A) because soda is a non-rival good B) to preserve its patent rights C) because the soda formula is a rival good D) to reap the benefits of excludability Answer: D Topic: 7.2 Policies to Promote Productivity 19) According to the Solow model, which type of government spending is more likely to raise the long-term growth rate of output per person, spending on infrastructure or spending on research and development? Answer: Spending on research and development. As a production input, infrastructure is much like capital, subject to diminishing returns. Infrastructure investments are likely to raise the level of output per person, but any effect on the growth rate is likely to be temporary. Spending on research and development, when effective, raises productivity directly. There are no diminishing returns, and improvements in technology may stimulate and enable further improvements, including those funded by private businesses. Topic: 7.2 Policies to Promote Productivity AACSB: Reflective Thinking

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20) Use the distinction between rival and nonrival to explain the college premium. Answer: College graduates have acquired knowledge and skills that enable their interaction with other inputs -- raw materials, capital goods, and other workers -- to be quite productive. Employees working together enhance the contribution of each other's skills without using up anyone's skills. Indeed, the productive application of skills is a way to strengthen and acquire skill. The skills are nonrival among employees and over time (allowing for periods of rest). Nonetheless, a single worker can, at any one time, perform just one set of tasks for a particular employer. The skills are rival across employers and tasks. Thus, incentives guide the allocation of skilled workers among available employers and tasks. Workers whose skills make a large contribution in productive tasks will be sought by employers eager to offer a wage that is correspondingly high. Topic: 7.2 Policies to Promote Productivity AACSB: Reflective Thinking 21) Imagine that encryption and related technologies become so advanced that the knowledge produced by research and development are as excludable as any other good, while technology remains nonrival. In a world in which technology is both nonrival and excludable, do the government policies of government spending on R&D, tax incentives for R&D, and patents continue to make sense? Answer: If technology were inherently excludable, patent protections would be redundant. Laws against theft would suffice. Both government spending and tax incentives would be justified, because private businesses would allocate resources to research and development based on profit expectations. Because new ideas are costly to produce, private R&D efforts will focus on ideas for which users will be willing to pay a high price, excluding all other potential users. The result is that available ideas are underutilized, given that the true resource cost of using them once they exist is near zero. The underutilization of ideas leads, as well, to underproduction of ideas, since technology is a key input in its own production. Topic: 7.2 Policies to Promote Productivity AACSB: Reflective Thinking

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7.3 Institutions and Property Rights 1) The legal system in which the law is continually reinterpreted by judges is labeled________. A) a Napoleonic system of law. B) a tropicalismo system. C) a common law system. D) a constitutional system. Answer: C Topic: 7.3 Institutions and Property Rights 2) According to Nobel Prize winner Douglass North, the most important factor in limiting economic growth in developing countries today is________. A) the relatively low level of saving. B) the relatively high rate of inflation. C) the inability to develop effective low-cost contract enforcement. D) the inadequate state of the health care system Answer: C Topic: 7.3 Institutions and Property Rights 3) The legal system based on common law derives from the experience of which country? A) France. B) England. C) Germany. D) Rome. Answer: B Topic: 7.3 Institutions and Property Rights 4) English common law is particularly effective because________. A) it was derived from the Napoleonic codes of the period of industrialization. B) it is the only system that provides protection for personal property rights. C) it is able to evolve over time. D) of the diverse character of the British Empire. Answer: C Topic: 7.3 Institutions and Property Rights AACSB: Analytical Skills 5) The elements of an effective legal system include ________. A) strict limits on the ability of judges to interpret law B) a temperate climate C) a large body of legislators D) an adequate supply of lawyers Answer: D Topic: 7.3 Institutions and Property Rights

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6) The Doing Business reports provide information on________. A) the size of a country's national debt. B) the rate of inflation. C) the independence of individual central banks. D) how easy it is to conduct business in different parts of the world. Answer: D Topic: 7.3 Institutions and Property Rights AACSB: Analytical Skills 7) The Doing Business reports are considered by many economists to have contributed to economic growth and poverty reduction. The effectiveness of the reports may be attributed to ________. A) their encouragement to governments to reduce impediments to business B) their encouragement to businesses to migrate to business-friendly locations C) their deepening of economists' understanding of economic growth D) their exposing of corrupt officials and practices Answer: A Topic: 7.3 Institutions and Property Rights AACSB: Reflective Thinking 8) Governments that steal from their own citizens are known as________. A) pure democracies. B) kleptocracies. C) Mugabes. D) antediluvians. Answer: B Topic: 7.3 Institutions and Property Rights 9) Which of the following is poorest country? A) Canada. B) Mexico. C) Haiti. D) New Orleans. Answer: C Topic: 7.3 Institutions and Property Rights 10) The amount of foreign aid provided by the United States________. A) constitutes a major proportion of federal government outlays. B) is the highest in percentage terms for any developed market economy. C) averages about 2.7 percent of U.S. income per year. D) is a very small percentage of gross national income. Answer: D Topic: 7.3 Institutions and Property Rights

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11) Extreme global poverty is defined as________. A) income of less than one dollar a day. B) foreign debt in excess of 100% of GDP C) one percent of U.S. income. D) one-fourth of U.S. income. Answer: A Topic: 7.3 Institutions and Property Rights 12) Mobutu Sese Seko was President of________. A) Canada. B) Zaire. C) Cote d'Ivoire D) Tajikistan. Answer: B Topic: 7.3 Institutions and Property Rights 13) The impact of foreign aid on developing countries has been reduced by________. A) the low rate of saving in these countries. B) the Marshall Plan. C) the misuse of foreign aid funds by corrupt governments. D) the low rate of consumption in these countries. Answer: C Topic: 7.3 Institutions and Property Rights AACSB: Analytical Skills 14) An example of foreign aid that has improved economic conditions is ________. A) funding of public health programs B) funding of the U.S. Interstate Highway System C) programs to reduce foreign debt D) the Napoleonic code Answer: A Topic: 7.3 Institutions and Property Rights 15) How does the centrality of institutions and property rights in economic growth help to explain the predominance of rich countries in temperate climates and of poor countries in the tropics? Answer: Legal systems in most countries throughout the world are a legacy of European colonialism. Economic growth in any country seems to depend a great deal on how the "average person" is treated by the legal system. In the tropics, generally, legal systems were designed to favor the tiny European minority, rather than the "average person." Even now, these systems tend to protect the elite, rather than to provide opportunities for others. By contrast, in temperate locations where large numbers of Europeans and their descendants exceeded the indigenous populations, legal systems were designed to restrict the power of the elite, which has promoted the economic potential and ambitions of the majority of citizens. Topic: 7.3 Institutions and Property Rights AACSB: Reflective Thinking 10 Copyright © 2012 Pearson Education, Inc.

7.4 Endogenous Growth Theory 1) The goal of endogenous growth theory is to explain________. A) supply and demand in individual markets. B) the causes of technological advance. C) the business cycle. D) the relationship between economic growth and the rates of inflation and unemployment. Answer: B Topic: 7.4 Endogenous Growth Theory AACSB: Analytical Skills 2) The Romer model is distinct from the Solow model in that the former assumes that________. A) technology is fixed. B) an increase in price affects quantity demanded, rather than demand. C) some labor is devoted to producing new technology. D) output per worker is fixed. Answer: C Topic: 7.4 Endogenous Growth Theory AACSB: Analytical Skills 3) The key endogenous variable in endogenous growth theory is ________. A) the level of technology B) the productivity of research and development C) the growth rate of output D) the level of per capita income Answer: A Topic: 7.4 Endogenous Growth Theory 4) The quote, "If I have seen farther than others, it is because I have stood on the shoulders of giants" is attributed to________. A) Albert Einstein. B) Paul Romer. C) Friedrich Nietszche. D) Sir Isaac Newton. Answer: D Topic: 7.4 Endogenous Growth Theory 5) A change in which of the following can change the long-run growth rate of the economy in the Romer model? A) investments in public infrastructure B) the national saving rate C) the fraction of the population engaged in and the productiveness of research and development D) government spending and tax rates Answer: C Topic: 7.4 Endogenous Growth Theory AACSB: Analytical Skills 11 Copyright © 2012 Pearson Education, Inc.

6) A likely way to increase the productivity of workers engaged in research and development is to ________. A) increase the size of the labor force B) increase the number of workers engaged in research and development C) invest more in the education of scientists D) increase the national saving rate Answer: C Topic: 7.4 Endogenous Growth Theory 7) The key assumption of the Romer model that allows an explanation of sustained growth in output per person is ________. A) technology is nonrivalrous B) the total amount of labor is fixed C) some labor is devoted to producing new technology D) the saving rate is fixed Answer: A Topic: 7.4 Endogenous Growth Theory 8) Growth of output per person at a constant rate is referred to as ________. A) a balanced growth path B) a steady state C) a ratio scale D) an amplification effect Answer: A Topic: 7.4 Endogenous Growth Theory 9) The result that the growth rate of output per worker is equal to 1.43 × A) true of the Solow model only B) true of both the Solow model and the Romer model C) true of the Romer model only D) true under the common-law legal system only Answer: B Topic: 7.4 Endogenous Growth Theory

is ________.

10) If the level of technology rises from 8 to 8.2 in one period, the growth rate of technology is ________. A) 2.5 percent B) 20 percent C) two percent D) 0.2 percent Answer: A Topic: 7.4 Endogenous Growth Theory AACSB: Analytical Skills

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11) Output per person is 170 in an economy in which 15 percent of the population are engaged in research and development, where their productivity is 0.002, and the total population size is 100 million. If this economy is on a balanced growth path, then output per person in the next period will be ________. A) 175.1 B) 195.5 C) 176.2 D) 177.3 Answer: D Topic: 7.4 Endogenous Growth Theory AACSB: Analytical Skills 12) An economy with population 500 million has a research and development productivity of 0.0005, and its output per person has risen from one period to the next along its balanced growth path from 350 to 362.5. The fraction of this economy's population engaged in research and development is ________. A) 14% B) 2.5% C) 3.6% D) 10 % Answer: D Topic: 7.4 Endogenous Growth Theory AACSB: Analytical Skills 13) In a logarithmic scale________. A) the ratio of capital to labor is constant. B) the vertical axis lies along the horizontal axis. C) equal distances reflect the same percentage change. D) values along the vertical axis correspond to the square root of values along the horizontal axis. Answer: C Topic: 7.4 Endogenous Growth Theory AACSB: Analytical Skills 14) Because old ideas are an input in the production of new ideas, nothing prevents the growth rate of output per person from rising without limit. Comment. Answer: The inference is false. The growth rate of output per person depends on the growth rate A t of technology: = xLA. Both the productivity of R&D and the quantity of labor engaged in At R&D can change, but are subject to strict limits. The technology-growth equation implies that living standards need never stop improving, but the rate of improvement is always limited by our finite ability to reach a bit higher than our giant forebears. Topic: 7.4 Endogenous Growth Theory AACSB: Reflective Thinking

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15) An economy has 20 million workers in research and development, where their productivity is 0.004, and the level of technology is 6.75. The depreciation rate is 0.15, and the saving rate is 0.2. The per worker production function is y = Ak1/3 (1-α), and there are 180 million production workers. Show that, in equilibrium, the ratio of capital to output is constant. 2/3 Answer: The current equilibrium capital-labor ratio equals sA = 27. Output per worker is

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18.2, so the capital-output ratio is 1.48. After one period, technology has risen to 7.29, and the capital-labor ratio rises to 30.3. Output per worker is now 20.5, so the capital-output ratio is still 1.48. Topic: 7.4 Endogenous Growth Theory AACSB: Analytical Skills 16) The growth accounting equation is gY = gA + (0.3)gK + (0.7) gL. An economy with an initial workforce of 50 million allocates 20 percent of them to research and development, where their productivity is 0.003. If the labor input in this economy is growing at one percent, and the growth rates of capital and output are equal, what is that common growth rate? Is this a realistic scenario? Answer: The growth rate of technology = 0.003 * 0.2 * 50 = 0.03. Setting gY = gK, we have gY = 0.03 + 0.3 * gY + 0.007. Solving, gY = 0.053. If the underlying parameters do not change, the rising labor force will cause continual increases in the growth rates of technology, capital, and output. The growth path is balanced, but implausible, since no real economy can grow at an everaccelerating pace. Topic: 7.4 Endogenous Growth Theory AACSB: Reflective Thinking 7.5 Factors That Affect Endogenous Growth 1) In the Romer model. as more labor is devoted to research and development________. A) there is an immediate decrease in output per capita. B) there is an immediate increase in output per capita. C) output per capita is unaffected, but the savings rate begins to rise. D) output per capita is unaffected, but the savings rate begins to fall. Answer: A Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 2) In the Romer model, as more labor is devoted to research and development there is________. A) an immediate increase in output per capita and a permanent increase in output per capita. B) an immediate decrease in output per capita and a permanent increase in output per capita. C) an immediate increase in output per capita and a permanent decrease in output per capita. D) an immediate decrease in output per capita and a permanent decrease in output per capita. Answer: B Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills

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3) The Romer model suggests that there is a trade-off between ________. A) the use of resources in research and development and the productiveness of R&D B) the rate of saving and the long-run growth of output C) per capita output in the short-run and long-run D) the size of the total population and the saving rate Answer: C Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 4) Spending on education is likely to raise output per person by ________. A) increasing the productiveness of R&D B) by increasing the population C) increasing the fraction of the population engaged in productive activities D) increasing the saving rate Answer: A Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Reflective Thinking 5) Endogenous growth theory supports the conclusion that________. A) government spending cannot influence the level of research and development. B) increased government spending on research and development is counterproductive. C) per capita income growth is a function of real factors, such as the supply of money. D) increased government spending on research and development is useful. Answer: D Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 6) One difference between a policy of direct spending by the government on research and development and an alternative policy of tax incentives to encourage private spending on R&D is ________. A) the former improves the productivity of R&D, while the latter raises its level B) the former requires a decrease in national saving, while the latter causes an increase C) the former raises the level of R&D spending, while the latter also improves its productivity D) the former requires an increase in national saving, while the latter causes a decrease Answer: C Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Reflective Thinking 7) According to the Romer model, tax incentives to support research and development will lead to________. A) higher tax rates in the future. B) an increase in the general level of prices. C) a decrease in the general level of prices. D) increased per capita income. Answer: D Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 15 Copyright © 2012 Pearson Education, Inc.

Assume that the growth rate of the capital stock in each period is determined by the level of output in the previous period. 8) An economy of 80 million people has ten percent of them engaged in research and development, where their productivity is 0.0035. The economy is on a balanced growth path, when suddenly 2.88 million people move from goods production into R&D, raising the fraction there to 13.6 percent. In the one period that begins with this labor reallocation, the growth rate of output is ________. [Refer to the instruction above.] A) 2.8% B) 0.0% C) 3.8% D) 2.2% Answer: D Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 9) An economy of 82 million people has twenty percent of them engaged in research and development, where their productivity is 0.003. The economy is on a balanced growth path, when suddenly the productiveness of R&D rises to 0.004. For the one period that begins with this productivity increase, the growth rate of output is ________. [Refer to the instruction above.] A) 8.7% B) 9.4% C) 6.6% D) 7% Answer: B Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 10) An economy of 25 million people has twenty percent of them engaged in research and development, where their productivity is 0.0056. The economy is on a balanced growth path, when suddenly a wave of immigration raises the population to 27 million. Assume that the new workers are immediately "on the job," and that the fraction engaged in R&D remains twenty percent. For the one period that begins with this population increase, the growth rate of output per person is ________. [Refer to the instruction above.] A) 4.3% B) 1.8% C) 3% D) 8% Answer: B Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills

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11) According to the Romer model, an increase in population will cause________. A) an immediate increase in output per capita and a permanent increase in output per capita. B) an immediate decrease in output per capita and a permanent increase in output per capita. C) an immediate increase in output per capita and a permanent decrease in output per capita. D) an immediate and permanent decrease in output per capita. Answer: B Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 12) The Solow model is distinct from the Romer model in that an increase in population tends to cause________. A) a permanent decrease in the standard of living in the Romer model. B) an increase in spillover effects in the Solow model, but not in the Romer model. C) a permanent increase in the standard of living in the Solow model. D) a permanent increase in the standard of living in the Romer model. Answer: D Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 13) Technological spillover________. A) is made possible by the nonrivalry of ideas. B) generates an increase in both capital and labor. C) is caused by population growth. D) is caused by population decline. Answer: A Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 14) The observation that countries with high rates of population growth don't have higher per capita income ________. A) suggests that the Solow model is unrealistic B) implies that technology doesn't work as well in countries where the population is growing rapidly C) is not supported by most empirical studies D) is consistent with the Romer model as applied to the world as a whole Answer: D Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Reflective Thinking 15) When technology improves in a country with a fast-growing population ________. A) output rises, but output per person does not B) output rises in that country, while output per person rises in other countries C) output per person rises in that country and around the world D) output per person rises temporarily, then declines Answer: C Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 17 Copyright © 2012 Pearson Education, Inc.

16) The current world population is________. A) 6 million. B) 6 billion. C) 6 trillion. D) 6 gazillion. Answer: B Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 17) The Romer and Solow models reach the same conclusion with respect to________. A) output growth in the long-run. B) the impact of changing population. C) the effect of an increase in the saving rate. D) the general level of prices. Answer: C Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills

18) The graph above might represent the ________. A) response to an increase in the fraction of the population engaged in research and development B) response to a rise in the productiveness of research and development C) response to an increase in the total population D) response to a rise in the saving rate Answer: A Topic: 7.5 Factors that Affect Endogenous Growth 19) On the graph above, for a while after t = 0, the growth rate of output per worker is ________ the growth rate prior to time zero, and ________. A) below; rising B) below; falling C) above; constant D) above; falling Answer: A Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 18 Copyright © 2012 Pearson Education, Inc.

20) On the graph above, for a while after t = 0, the growth rate of technology is ________ the growth rate prior to time zero, and ________. A) below; falling B) below; rising C) above; constant D) above; falling Answer: C Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills 21) On the graph above, the constant value 1.43 is ________. A) the productivity of labor devoted to research and development B) the logarithmic scale C) the amplification effect of improving technology D) the initial level of technology Answer: C Topic: 7.5 Factors that Affect Endogenous Growth 22) How might technological spillover explain why countries with high rates of population growth don't have higher per-capita income? Answer: In the Romer model, population increase causes an increase in the rate of technological progress, because there are more people engaged in research and development. Technology, however, is not easily contained within national borders, so the technology available in each economy depends not on the size of its own population but, rather on the world technological frontier. A population increase in any one economy has an imperceptible effect on the technology in use in that economy. Though technological breakthroughs always occur "somewhere," they are quickly available "everywhere," so the growth impact in the economy of origin is not much different from the impact in other economies. Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Reflective Thinking 23) Suppose a wave of immigration increases the number of workers in research and development without altering the labor input in production. Describe the impact on the level and growth rate of output per worker, immediately, and as time passes. Answer: This scenario is an increase in both the total population and in the fraction of the population engaged in research and development. One immediate impact is that an unchanged level of output is divided among a larger total workforce, so output per (total) worker is reduced. A second immediate impact is an increase in the growth rate of technology. Since the capitallabor ratio (in production of goods and services) is not immediately affected, the growth rate of output adjusts all-at-once to equal 1.43 times the higher growth rate of technology. Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Reflective Thinking

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24) Technology grows at a rate of three percent in an economy in which ten percent of the workforce is engaged in research and development, where their productivity is 0.003. The economy is on a balanced growth path, and the workforce is growing at two percent. Calculate the growth rates of output, capital, and output per worker now, and five years from now. Answer: The growth rate of output and of capital per worker is 1.43 × 0.03 = 0.043. Since the workforce is growing at two percent, output and capital are growing at 0.063. The three percent growth rate of technology equals 0.003 × 0.1 × N, so N = 100. After five years of growth at the two percent rate, N = 110, so the growth rate of technology has risen to 3.3 percent. The new growth rate of capital and output per worker is 0.047, so output and capital grow at 0.067. Topic: 7.5 Factors that Affect Endogenous Growth AACSB: Analytical Skills

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